FirstGroup, owner of Greyhound buses in the United States and operator of British rail franchises including the Thameslink route across London, has been under pressure to improve its performance and last year had to raise 615 million pounds to avoid its credit rating being cut to "junk" status.

It also scrapped its final dividend for what it said would be a 12 month period to fund investments, saying last May it planned to pay out about 50 million pounds in a final dividend for the financial year to the end of March 2014.

However it has now abandoned that plan, citing slower progress in the turn round of its yellow school bus unit in the United States and investment needs.

In a statement on Wednesday, Chairman John McFarlane, who joined FirstGroup in January, said: "It will take some time before the group is able to deliver a profile of consistent surplus cash that can be distributed to shareholders."

The group, whose debts in part reflect the near 2 billion pound U.S. Laidlaw acquisition in 2007 that brought it yellow school buses and Greyhound, has also come under pressure from U.S. hedge fund Sandell Asset Management to divest its U.S. operations to invest in its domestic arm.

REALISTIC VIEW

But McFarlane threw his weight behind the company's strategy for reviving the underperforming U.S. First Student and UK Bus units, whose revival is key to generating additional cash flow to help the company reduce its debts and fund dividends.

Shares in FirstGroup, which carries more than 2.5 billion passengers a year in Britain and North America and which is bidding to run several new rail contracts in the UK, were up 3 percent to 136.2 pence in morning trading.

"We think the news that the group will not pay a dividend is positive, showing it taking a more realistic view of its cash flow challenge," analyst Joe Spooner at brokerage Jefferies said.

FirstGroup has for some years struggled to reduce its borrowings, which still total 1.3 billion pounds (down 34 percent from a year ago), much of which come from the 1.9 billion pound Laidlaw acquisition in 2007.

Its stock has lost about 70 percent of its value since that acquisition.

The company's net debt to core earnings ratio has fallen to 2.2 times from 3.4 times last year, it said, adding it was considering ways to accelerate improvements to cash flow to help reduce its debt. It did not expand on what that could involve.

For the year to March 31, FirstGroup reported a 23 percent rise in pretax profit to 112 million pounds, compared with a Thomson Reuters consensus forecast of 114.7 million from a poll of 14 analysts.

The performance of the U.S. bus businesses were affected by prolonged bad winter weather in the United States, prompting the Scotland-based company to warn in April of a 14 million pound hit to annual profits.

(Editing by James Davey and David Holmes)

By Sarah Young